Retirement Timing: May vs. March

RecliningInPeace

I understand that retiring in March is beneficial for fresh personal, CGT, and other allowances after the new tax year starts. However, my March bonus won't be paid if I'm under notice. If I give notice after the March payment, with two months' notice, I would retire in late May.

As a higher rate taxpayer, I'm considering salary sacrificing 60% of my income in April and May into my work DC scheme, leaving me a basic rate taxpayer for those months. I would then draw from SIPP and ISA for the rest of the tax year such that I remain a basic rate taxpayer.

Are there any issues with this approach? I'm happy to provide more information if needed.

Thank you.

Juno_Moneta

Sounds perfectly logical to me! 

Congratulations on your retirement. 

Triumph13

Retiring at the end of the tax year is overrated.  May has the advantage of getting paid for four extra bank holidays, but the disadvantage that you were working through one of the nicest months

Have you already qualified for the full state pension?  If not, then it may be worth keeping enough income in April and May to get your qualifying year, but you'd have to do the sums to compare that to what you'd gain by having a bigger TFLS by sacrificing / contributing more.  You'd need to take into account if you're likely to hit the lifetime TFLS limit and/or 40% tax in retirement.

RecliningInPeace

Thanks for the comment, @Triumph13.

I had not thought about the bank holidays, but that is a very good point - a few free days off to practice being retired!

Re state pension, that is an interesting consideration. I will be about 8 years short (only moved to the UK when I was in my late 20s) and had planned to buy the extra years. Where is the best place to research how much income I'd need in a tax year to qualify for an extra year's pension? I'm already over the lifetime TFLS but have a withdrawal plan that keeps me in the basic band for most years in most scenarios - using ISA and VCTs.

Thanks again.

saajan_12

If your private pension / other income is above the higher rate threshold then it doesn't make a difference, as you'll still be taxed at 40% so it makes no difference.

If below, then by retiring mid tax year, you may pay 40% instead of 20% tax on some  of the pension income, but you also save by paying 20% instead of 40% on some of your employed income. So it all comes out even at the end, and only makes a difference if you're living month to month without real savings.

The other aspects eg ISA contributions, CGT etc can be managed by still making any investment decisions at the end of the year, they dont' have to be tied to when you retire. 

Triumph13

RecliningInPeace said:

Thanks for the comment, @Triumph13.

I had not thought about the bank holidays, but that is a very good point - a few free days off to practice being retired!

Re state pension, that is an interesting consideration. I will be about 8 years short (only moved to the UK when I was in my late 20s) and had planned to buy the extra years. Where is the best place to research how much income I'd need in a tax year to qualify for an extra year's pension? I'm already over the lifetime TFLS but have a withdrawal plan that keeps me in the basic band for most years in most scenarios - using ISA and VCTs.

Thanks again.

In simple terms, and using 25/25 thresholds, and assuming you are paid monthly, you need to earn £6,500 across those two months, but:

1. Anything over the upper limit of £4,189 in any one month is ignored; and
2. Any month where you earn less than the lower limit of £542 is ignored.

So if you earned £6000 in one month and £500 in the other you wouldn't make it as only £4,189 would count from the first and the other would be ignored entirely, but if you earned £3,250 in each then you would be fine - although I'd want to leave a bit more leeway myself!

A more important consideration may be this: 

         When you've got enough to retire and had enough of work, then it's time to go. 

It sounds like you are already in a position where the extra money earned / saved will make no real difference to you at all.  So it shouldn't drive the decision of when to go.

RecliningInPeace

Triumph13 said:

RecliningInPeace said:

Thanks for the comment, @Triumph13.

I had not thought about the bank holidays, but that is a very good point - a few free days off to practice being retired!

Re state pension, that is an interesting consideration. I will be about 8 years short (only moved to the UK when I was in my late 20s) and had planned to buy the extra years. Where is the best place to research how much income I'd need in a tax year to qualify for an extra year's pension? I'm already over the lifetime TFLS but have a withdrawal plan that keeps me in the basic band for most years in most scenarios - using ISA and VCTs.

Thanks again.

In simple terms, and using 25/25 thresholds, and assuming you are paid monthly, you need to earn £6,500 across those two months, but:

1. Anything over the upper limit of £4,189 in any one month is ignored; and
2. Any month where you earn less than the lower limit of £542 is ignored.

So if you earned £6000 in one month and £500 in the other you wouldn't make it as only £4,189 would count from the first and the other would be ignored entirely, but if you earned £3,250 in each then you would be fine - although I'd want to leave a bit more leeway myself!

A more important consideration may be this: 

         When you've got enough to retire and had enough of work, then it's time to go. 

It sounds like you are already in a position where the extra money earned / saved will make no real difference to you at all.  So it shouldn't drive the decision of when to go.

Thank you for the NIC explanation.

You are right about the more important consideration. As it is becoming more real for me now and I am getting into the finer details of planning my exit, I do sometimes get lost in the details. An extra SP qualifying year or the bonus (only worth around a month's income) will make no material difference to my position. Still, it is good to have information available on which to base decisions, even if choice A is immaterially close in outcome to choice B.

I appreciate you taking the time to reply.

cfw1994

I ended up giving up a bonus when I stepped away….just to be able to complete the Lands End to Edinburgh part of LEJoG to meet some pals who were doing their last leg that year.
Money is always one thing, but time is a precious other!

If you can swing it to earn around £6,500 to get the extra year for SP, that makes some sense though.
Congrats!

ukdw

I'd probably focus more of my tax planning and salary sacrifice stuff on this tax year.  

As for April and May next year I wouldn't worry about keeping the individual months pay in the basic rate band as you can always reclaim the higher rate tax as long as your drawdown for the whole year plus the April and May salary are within the basic rate band.

I also timed my retirement based on a bonus eligibility timing - I resigned within a few hours of the bonus arriving.  

MallyGirl

I had spent time wondering about the best time for retiring next year but my bonus was paid in June and I was on 3 months notice so I would have lost the whole summer. Not worth it 

RecliningInPeace

MallyGirl said:

I had spent time wondering about the best time for retiring next year but my bonus was paid in June and I was on 3 months notice so I would have lost the whole summer. Not worth it 

Indeed. Funds allowing, you have to draw a line somewhere, else it is too easy to get dragged into a "Just one more year" mindset.